Mitt Romney’s tax returns make him an exemplar of GOP tax policy

With the release of his tax returns Tuesday, Mitt Romney has emerged as Exhibit A in a political battle likely to define the 2012 election: how to tax the rich.

To Democrats, Romney is benefiting from an unfair tax code that permits a man who made nearly $21 million last year to pay just 15 percent in federal taxes. In his State of the Union address Tuesday, President Obama said those earning more than $1 million a year can afford to pay more and should send at least 30 percent of their income to Washington.

“You can call this class warfare all you want,” Obama said. “But asking a billionaire to pay at least as much as his secretary in taxes? Most Americans would call that common sense.”

To Republicans, Romney is an exemplar of the capitalist system, a wealthy man who propels the economy through successful investments. Many of them think he should pay even less to the federal government. Indeed, Newt Gingrich, Romney’s chief rival for the GOP presidential nomination, has proposed eliminating taxes on investment income altogether — a move that would push Romney’s tax rate near zero.

This ideological divide has shaped the parties’ competing visions for how to heal the wounded economy, plans that are typically unfurled on the campaign trail with vague promises and glossy platitudes. Romney’s tax returns put a face on the competing proposals, offering a real-life example of their consequences.

Although he defended his tax payments as “entirely legal and fair,” Romney signaled unease with the direction that many in his party are taking in suggesting he pay less. During a debate Monday in Tampa, Romney noted that “I’d have paid no taxes in the last two years” under Gingrich’s tax proposals.

The debate over Romney’s tax rate comes as Democrats are ramping up an election-year argument that the wealthy should pay more to help finance government services and close a yawning budget deficit. In a time of rising income inequality, when the rich are reaping an expanding share of the nation’s wealth and middle-class wages have stagnated, Obama said Tuesday that the rich must shoulder a greater share of the economic burden.

Obama has called for a rewrite of the tax code that would raise the top tax rate on earned income. On Tuesday, the White House said the president would call on Congress to wipe out lucrative tax breaks on mortgage interest, health insurance and retirement savings for those who earn more than $1 million a year.

If that doesn’t do the trick, White House officials said Obama would implement a rule that would explicitly require millionaires to send at least 30 percent of their income to Washington, although they provided few details about how that would be accomplished.

Such a proposal would hit Romney hard, effectively doubling his tax bill. Instead of paying $3 million to the IRS for 2010, his tax bill would have been about $6.42 million. And Romney might have owed even more if Obama’s rules made his retirement account, worth as much as $101 million, subject to immediate taxation.

Conservative tax experts blasted the proposal, arguing that it would devastate the struggling economy. Raising taxes on someone like Romney would force him to “move the money offshore. Then his money will create jobs for somebody else, not for Americans,” said Kevin Hassett, director of economic policy studies at the American Enterprise Institute.

Hassett and other conservative economists also defended Gingrich’s tax plan, which would eliminate taxes entirely on capital gains, dividends and interest payments. Because virtually all of Romney’s income flows from those sources, he would have owed taxes only on the $530,000 in business income he claimed from speaking fees if Gingrich’s tax plan had been in effect in 2010.

And that tax probably would have been wiped out entirely by Romney’s deductions, said Roberton Williams, a senior fellow at the nonpartisan Tax Policy Center, which has analyzed the candidates’ tax plans. That would leave Romney owing no income taxes and only about $30,000 in payroll taxes, for an effective tax rate of about 0.14 percent.

“If you do the Gingrich approach, then you have by definition removed a significant tax burden from very wealthy people,” said Clint Stretch, a tax expert at the consulting firm Deloitte Tax. “And if you’re not going to reduce the size of government very significantly, you’ve necessarily begun to shift the tax burden to the middle class.”

Williams said Romney’s tax bill probably wouldn’t change much under his own tax proposal. It would eliminate taxes on investment income, but only for households making less than $200,000 a year.

Romney would benefit by making permanent the tax cuts adopted during the George W. Bush administration, which lowered rates on wages as well as capital gains. Obama wants to reverse the cuts, raising the top rate on wages from 35 percent to 39.6 percent and taxing capital gains and dividends at 20 percent rather than the current 15 percent.

Even if tax law is not changed, Heritage Foundation economist J.D. Foster argued that Romney already contributes at least 30 percent of his income to society.

Lori Montgomery oversees coverage of politics, national security, health/science and America. Before becoming an editor, she was a reporter covering U.S. economic policy, with a focus on efforts to tame the national debt.